As a manager of three open-ended funds, four investment trusts and a number of other mandates, Mark Barnett of Invesco Perpetual is a busy man filling a big pair of shoes after the departure of the star fund manager Neil Woodford.
Mr Barnett took the reins of Invesco's flagship income funds from Mr Woodford, and some may have seen this as a poisoned chalice. But with 23 years' experience in the industry and a strong track record in his own right, he is not a man to be intimidated. I recently caught up with him at Invesco Perpetual's Henley office.
Not one to let the grass grow under his feet, he has spent the past 18 months reshaping the Invesco Perpetual Income and High Income funds to suit his own style of investment. Many managers hang on to a predecessor's portfolio far too long, in my view. This often causes stores up problems for the future. So I am glad Mr Barnett has made these funds his own.
The Income and High Income funds were historically concentrated on the top 10 holdings. Mr Barnett has increased diversification by reducing this focus from between 55 per cent and 60 per cent to around 40 per cent. The pharmaceutical sector, a large portion of the funds under Mr Woodford, has taken the brunt of the reductions. The fund's position in GlaxoSmithKline was sold and AstraZeneca was cut from around 10 per cent to nearer 4.5 per cent.
As exposure to healthcare was reduced, the manager increased the proportion invested in financial companies. Legal & General is a new addition to the portfolio alongside Provident Financial.
The funds currently have very little exposure to banks but Mr Barnett has been eyeing potential dividends in the sector. Banks have reduced risk, hold significantly more capital, and are more tightly regulated than they were before the financial crisis. Provided capital requirements are not increased further, many banks, particularly Royal Bank of Scotland, will soon be in a position to return surplus cash to shareholders, according to the manager.
Elsewhere, Mr Barnett has initiated a position in BP. He believes the oil giant has transformed itself since the Deepwater Horizon disaster in the Gulf of Mexico. Ironically, this event gave the company a headstart in cutting costs, forcing it to recognise their suppliers made big profits from the booming oil price while taking on little of the risk. It has since negotiated better fees, which means it is now in an excellent position, in the manager's view.
The recent collapse in the oil price hit BP's share price and it now yields 7.25 per cent. While many analysts are cautious on its sustainability, Mr Barnett is confident the company's cost reductions will allow the payout to be maintained.
"Oil is for running the economy, miners are to build one" is another of the manager's views. While oil will always be in steady demand, the requirement for raw materials is more closely linked to global growth. Although mining companies have been reducing their capital expenditure, Mr Barnett feels dividends in the sector are under threat from the slowing growth in China, The funds currently have no exposure to this area.
Like his predecessor, he mainly focuses on companies with sustainable dividends. He is cautious on his outlook for the UK economy and expects many companies will be forced to cut dividends by the end of 2016.
Mr Barnett therefore seeks companies with lower yields, which he believes are able to grow dividends over time. These include the AA, which doesn't currently pay a dividend, and Card Factory ,which yields 1.82 per cent.
This is a sensible approach in my view and is where the Investment Association pathology on dividends is flawed (both funds were removed from the IA UK Equity Income sector as they had failed to meet the yield requirement of 110 per cent of that produced by the FTSE All Share index).
Anyone can generate a portfolio of companies with high dividend yields. But Mr Barnett's focus on companies with strong balance sheets, resilient earnings and the ability to increase dividends is much more likely to provide superior returns over the long term.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.ukReuse content